Marek Hanusch

Jobless growth ? Okun's law in East Asia

Was economic growth in East Asia jobless? This paper addresses this question using data from eight East Asian countries during the period between 1997 and 2011 to estimate the Okuns Law Coefficient, which captures the relationship between growth and employment. The analysis suggests that growth was not jobless. However, there is considerable variation across countries. Generally, the effect of growth on employment tends to magnify under more flexible hiring and firing rules. Yet even where labor markets are more tightly regulated, economic growth affects employment, not necessarily in the aggregate but in its composition. There is evidence that agricultural employment moves counter-cyclically, as opposed to non-agricultural employment. The effect is particularly pronounced in periods of economic crisis, suggesting that agriculture may serve as a shock-absorber for workers laid off in the industrial sector. Isolating non-agricultural employment reveals a stronger relationship between growth and job creation.

Promises, Promises: Vote-Buying and the Electoral Mobilization Strategies of Non-Credible Politicians

Vote-buying is pervasive, but not everywhere. What explains significant variations across countries in the greater use of pre-electoral transfers to mobilize voters relative to the use of pre-electoral promises of post-electoral transfers? This paper explicitly models the trade-offs that politicians incur when they decide between mobilizing support with vote-buying or promises of post-electoral benefits. Politicians rely more on vote-buying when they are less credible, target vote-buying to those who do not believe their political promises, and only buy votes from those who would have received post-electoral transfers in a world of full political credibility. The enforcement of a prohibition on vote-buying reduces the welfare of those targeted with vote-buying, but improves the welfare of all other groups in society.

Political budget cycles and the organization of political parties

This paper introduces a new explanation for political budget cycles: politicians have stronger incentives to increase spending around elections in the presence of younger political parties. Previous research has shown that political budget cycles are larger when voters are uninformed about politician characteristics and when politicians are less credible. The effects of party age can be traced to organizational differences between younger and older parties that also affect voter information and politician credibility. Parties organized around particular individuals, rather than around policy labels or a party machine, are less likely to survive the departure of party leaders, to adopt organizational attributes that promote voter information and political credibility, and to limit political budget cycles. Previous research has also shown larger political budget cycles in younger democracies. Evidence presented here indicates that party age accounts for this effect.

The Doing Business Indicators, Economic Growth and Regulatory Reform

Improving the investment climate is among the top priorities in development. The World Bank Groups Doing Business reports have become an important guide and benchmark to inform regulatory reforms aimed at unleashing the potential of the private sector. This paper discusses the potential role of the Doing Business Indicators in the reform process. Generally, the Doing Business studies are constrained in their prescriptive power for policy making. However, governments that nonetheless choose to use the Doing Business reports for guidance in the reform process can aim to improve their Doing Business ranking to enhance the visibility of their general reform efforts; or they can aim at maximizing the impact of reform on economic growth. In this case, the evidence suggests that focusing on indicators relating to credit and the enforcement of contracts is the most important. Indicators related to cost have the largest potential for fostering growth.

Credit ratings and fiscal responsibility

The authors build on the findings from an earlier analysis, adding to the evidence base for the notion that credit rating agencies contribute to fiscal sustainability. To do so, the authors focus on election periods when political pressures for fiscal expansions are heightened. The literature on political budget cycles documents the tendency for budget deficits to increase in election years as governments attempt to appear economically competent by strategically providing additional publicly financed goods or services, or by cutting taxes. A rating downgrade, however, signals the opposite of competence as it implies an increase in the probability of sovereign default. Since credit ratings are widely observed - by financial markets as well as voters - they in effect serve as a disciplining device for fiscal policy not to submit to short-term spending pressures, thus keeping it responsible. The authors find that: (1) governments going into an election year immediately after a rating downgrade are 27 percentage points more likely to lose at the polls; and (2) governments going into an election year with a negative rating outlook (indicating a higher likelihood of a near-term downgrade) run smaller budget deficits compared to cases with positive or stable outlooks. Ratings act like fiscal rules disciplining governments when they are more vulnerable to political pressures on the budget - as opposed to fiscal policies supporting longer-term economic growth and development objectives.

Credit Rating Agencies in Emerging Democracies: Guardians of Fiscal Discipline?

Credit rating agencies have drawn criticism for failing to anticipate and deter root causes of the 2008-2009 financial crisis in the United States. However, this paper presents evidence that credit rating agencies regularly anticipate and deter governments in emerging democracies from opportunistic borrowing and potential financial crises related to elections and the political budget cycle behavior they encourage. The paper considers a sample of 18 such countries holding 32 presidential elections from 1989 to 2004. The analysis shows that credit rating agencies induced greater fiscal discipline during election periods when governments had incentives to borrow opportunistically for short-term electoral gain. Countries with higher credit rating agency sovereign ratings borrowed less than lower-rated countries in election periods, but borrowed more in non-election periods. Credit rating agencies promoted fiscal discipline during increasingly frequent election periods in emerging democracies.

Sovereign Risk and Strategic Debt

The world economy is engulfed in an economic crisis. In an attempt to avert a repetition of the Great Depression, governments across the globe have borrowed heavily to finance fiscal stimulus packages. Rising debt levels have put the credit ratings of many countries, including those in the developed world, at risk. A lower credit rating increases the cost of borrowing. Whilst it thus decreases leverage in fiscal policy, it also has, as this article will show, a positive side effect: since borrowing is costly, a lower credit rating decreases a governments incentives to increase the deficit shortly before elections to enhance its electoral stakes (resulting in a so-called political budget cycle). This proposition derives empirical support from 25 countries between the years 1980 and 2008.

An Empirical Investigation of Strategic Debt Under Power Sharing

Recent theoretical and empirical research has shown that the type of government has an important impact on governments’ incentives to borrow strategically before elections. This article brings together the findings of three studies, respectively by Chang (2008), Saporiti and Streb (2008), and Hanusch (forthcoming). In a comprehensive empirical study of developed as well as developing democracies between the years 1975 and 2001 it is shown that: 1) single-party governments borrow more before elections than coalition governments; 2) pre-election deficits are higher under unified than divided government; and 3) the more powerful the largest party in a coalition is, the higher will be the deficit before elections.